Jobs fears for ‘one-legged’ economy

Amazed ... Shane Oliver says a close look at the profits of the top 50 Australian companies how one-legged the economy has become.
Photo: Jim Rice

The major mining companies and big four banks generated 99 per cent of the profits made by the country’s largest 50 companies in the past financial year, underlining concerns that the two-speed economy masks serious problems.

The remaining 42 companies contributed only 1 per cent of profits, in a performance that sparked warnings to expect more job cuts.

Only 16 of the 42 non-bank, non-mining companies reported an improved result in the first half of this year – and six of those were in the energy sector, according to an analysis by accounting firm KPMG provided to The Australian Financial Review.

“It is an amazing statistic,” Shane Oliver, chief economist and head of strategy at AMP Capital Investors, said.

“It just highlights how one-legged the economy has really become. It is just basically the resources sector driving us along. The rest of the economy is really struggling,” Dr Oliver said.

“It is not ideal at all. Fair enough, the rest of the economy has to make room for the mining sector but seeing profits go backwards ultimately means you are going to see more and more unemployment and it is certainly not a good one for shareholders unless they put all their shares in resources.”

The manufacturing sector is under increasing pressure because of the high Australian dollar. Last month BlueScope Steel moved to axe 1000 jobs.

The KPMG report revealed that the four big mining companies contributed 78 per cent of the year-on- year profit growth for the top 50 companies.

Last year the sector generated about half of the top-50 company profits. It was less than 20 per cent a decade or so ago.

Rio Tinto’s profit represented 19 per cent. Fortescue Metals and Newcrest Mining made up the rest.

The big four banks contributed 21 per cent of the year-on- year profit growth.

But three years after the 2008 credit crunch, profits for the 42 non-bank, non-mining companies are languishing at 19 per cent below their June 2008 results.

“With the IMF warnings of a risk of a double-dip recession in the US and Europe and shaving the forecasts of Australia’s growth prospects for the coming year, the recent reporting session has highlighted the weakness in the Australian non-bank, non-mining sectors,” KPMG head of audit Duncan McLennan said.

“The recovery out of the GFC of these sectors has faltered, with a downward trend in profitability accelerating,” he warned.

The report also showed continued convergence between statutory and underlying profits, with a variance of only $4 billion last financial year, compared with $43 billion at the height of the economic downturn.

But asset write-downs have begun to increase once again, almost doub­ling to $6.1 billion for the six months ending June 30 – back above pre-GFC levels. However, this is still well below the peak of almost $40 billion during the crisis.

“Those sectors which continue to struggle, such as manufacturing and retail, are employers of large numbers of people, so we may see further restructuring as they battle to adapt to the current reality,” Mr McLennan said.

The Australian Financial Review

BY Patrick Durkin

Patrick is The Australian Financial Review's Melbourne bureau chief and deputy editor of BOSS magazine. He writes features across business and politics.